Belmont is about as convenient a city as one can find if you want to split the difference between the South Bay job centers of Mountain View and Sunnyvale, without being too far from San Francisco for the occasional jaunt to the city. Housing prices, to be sure reflect this fact. (Click images for larger photos)

And up in the hills, winding streets and Bay Views can make desirable homes downright expensive. That is, of course, until the housing market collapsed.

Belmont is by no means the cheapest place to live on the
Peninsula, but it is not Burlingame or Palo Alto either. With
good schools, convenient amenities and the aforementioned good location, the area can be a great place to lead the quiet, suburban lifestyle the Bay Area has become known for.

This home is a short sale, meaning the bank holding the current owner’s mortgage is letting them sell the house for less than the amount of the loan. The home appears to be in great condition with a reasonable yard for the hills, but is located on a somewhat busy street. It’s been on the market
since April without a price drop (despite the agent’s
claims to the contrary), so we would be surprised
if a price drop is forthcoming.

The home has some positive features, to be sure, but the
busy street may turn off some buyers: so is it a:
DEAL or NO DEAL?

Address: 1715 Notre Dame Ave., Belmont, CA
(MLS Listing)
Status: ACTIVE
Bedrooms: 2; Bathrooms: 2
Living Space: 1,670 sq ft
Lot Size: 7,250 sq ft
List Date: 4/4/2009
Original List Price: $695,000
Current List Price: $695,000
MLS no.: 80916993

Real Estate Agent Comment: Spectacular Bayviews! Short sale – dramatic price reduction. Amazing kitchen w/granite counters.Family Room. Large Florida Room, Large usable rear yard. A must see – views forever!

DEAL or NO DEAL?
Comment below and tell us what you think!

This post first appeared on Minyanville.

We have truly become a bailout nation.

As regulators mull over the possibility of rescuing CIT Group (CIT) — a small-business lender that counts over 1 million US firms as customers — analysts debate whether the relatively small firm is deserving of a taxpayer-funded bailout. Or for that matter, a bailout at all.

After converting to a bank holding company last year, CIT received $2.3 billion in TARP money to help solidify its financial footing. Yet even this injection of taxpayer capital couldn’t prevent its financial position from deteriorating further, and the company now faces the maturity of over $1 billion in bonds next month. Without government support, CIT doesn’t believe it will survive the summer.

The specter for a CIT bailout is a tricky political issue: It pits those that argue Washington must step in wherever necessary to support the reeling US economy, against those who are starting to wonder when the bailouts will stop and when bureaucrats will step back and allow the free market to determine who survives.

Few would argue that CIT presents a systemic risk to the US financial system; with a balance sheet of around $75 billion, the company is one-eighth the size of Lehman Brothers, according to research firm BTIG.

CIT is, however, a key lender to small businesses around the country. This means its failure could threaten salary payments for millions of American workers if the company’s customers are unable to get lines of credit with other financial institutions. Under different circumstances, banks like Wells Fargo (WFC), Citigroup (C), and Bank of America (BAC) would be eagerly serving CIT’s clients. Instead, they’re focused on reining in lending of their own.

If CIT were to fail, it would mark the biggest bank failure since Washington Mutual — now part of JPMorgan Chase (JPM) — collapsed last September.

By letting CIT fail and coordinating an orderly shuttering of its operations, the Obama administration has the opportunity to re-establish an old precedent long since forgotten in these turbulent economic times: Firms that should fail actually fail.

If, instead, the government rescues CIT, the yardstick by which we measure “Too Big to Fail” will be severely shortened. This wouldn’t be a welcome development.

For the past year, government power brokers — rather than market forces — have picked the winners and losers as financial firms have been besieged by a massive deflationary debt unwind. Further, as Washington wades deeper and deeper into the day-to-day operations of American business, companies are starting to compete for government cash, not customers.

Moral hazard is a concept quickly brushed to the side during times of crisis, but it’s precisely during these trying times that market principles should be the most firmly upheld. Sadly, over the past 24 months, the opposite has held true.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Price discovery. It sounds simple enough, right? If you separate out its component parts, you have “price” — the amount buyers are willing to pay and sellers are willing to accept — and “discovery” — the uncovering of that price.

But price discovery — a term which is bandied about in all corners of the financial markets — has a meaning far deeper than this cursory analysis.

In a financial sense, it’s defined as the point at which the free market — the natural interplay between supply and demand — converge on a single point where buyers and sellers can find mutual ground. There, you have price discovery.

In a practical sense, it happens every day; each time an economic transaction occurs. Coffee at Starbucks (SBUX) costs more than, say, coffee at any other establishment on the planet, because consumers have determined they’re willing to pay a premium for it. Starbucks, for its part, has generously sprinkled its stores on street corners around the world, matching supply with this persistent demand. The price, even though most of us scoff at the mere thought of forking over more than $4 for some contrived, flavored coffee-like drink, is what the market will bear.

So why then do financial-market participants make such a big deal about “true price discovery” in trying to analyze specifically when and where markets will bottom? The key is in the definition.

Let’s examine the housing market to see why this distinction matters, and how the dynamics effecting price discovery are so important.

Homes, unlike cups of coffee, are rarely bought and sold — other than when entire neighborhoods are turned over (which seems to happen with frightening regularity). But buying or selling a home typically involves uprooting one’s family, hauling boxes across town (or across the country), switching schools, changing jobs, and otherwise disrupting the flow of life.

When talking about the housing market, most pundits and so-called experts typically focus on the demand side of the equation. How low are interest rates? Did Wells Fargo (WFC) just tighten its mortgage guidelines? Are property values increasing or decreasing? How is the job market doing? On a more personal level, getting married, having kids, changing jobs, seeking out a slower (or faster) pace of life, or looking to trade up into a better school district or bigger home can all lead buyers to jump into the market.

Sellers, on the other hand, are typically hard-pressed to sell. Many of the same circumstances (jobs, retirement, family, etc.) lead a seller to enter the market, but leaving a home and the emotional attachment therein, is an extremely difficult decision to undertake without a very compelling reason.

In the current housing downturn, as social mood has swung violently towards risk aversion and shorter time preferences, the decision to sell one’s home has effectively become that of necessity, or nothing at all. In other words, the vast majority of sellers on the market right now are forced sellers — those who don’t have any choice.

So what does this all have to do with price discovery?

The destruction of a widely held economic belief — namely, that housing prices only go up –has thrown the interplay between supply and demand out of whack. Couple that with insane leverage, abnormally low interest rates, virtually non-existent underwriting guidelines, and massive government intervention in the form of Fannie Mae (FNM) and Freddie Mac (FRE) that caused the recent boom, and in reality, the fundamentals of supply and demand have been wonky for years, if not decades.

As these imbalances are worked through and the weakest hands are forced to fold, markets are slowly starting to heal. And even though massive loan-modification efforts and foreclosure moratoria are once again throwing true supply and demand out of whack, the free market is a powerful force: Certain real-estate markets around the country are beginning to show signs of healthy stabilization.

Price discovery is emerging, as housing prices return to more traditional measures of affordability where buying begins to make just as much sense as renting. To be sure, there’s a fear of losing equity as prices tumble, but the emotional pull of owning a home is, and always will be, a powerful force. Other markets, however, have a very long way to go.

Since founding Cirios Real Estate, I’ve spent a dizzying amount of time looking at local housing markets in California. And in trying to identify trends on a neighborhood-by-neighborhood, street-by-street basis, I’ve found one trend that’s 100% consistent around the state. And although California is a rather unique case, I know enough about markets around the country to be confident this is true there as well.

Markets that have seen the most extreme home-price declines are the ones where owners faced massive amounts of negative equity and foreclosures ran rampant. Virtually every sale in these markets over the past 2 years has been the result of a seller being forced to sell.

On the other hand, markets where job losses have been less severe have seen prices ramp up less severely during the boom; schools are better and fundamental desirability is higher. Sellers have broadly had the luxury of holding out, hoping the market would turn before they, too, would be forced to put their home on the market.

When there are no more forced sellers in a given market — or at the very least, the proportion of forced sellers and non-forced sellers returns to more normal levels — healthy stabilization can occur. And in order for this to happen, years of froth and excess must first be worked off. This can happen via 2 methods, which Toddo often discusses when analyzing the stock market: time and price.

Time can heal wounds as demographics shift and new buyers enter a given market, or low prices can bring investors out of the woodwork to snap up underpriced homes.

There isn’t some magic formula or complex property-valuation algorithm (sorry Zillow) that can determine where a given markets is in the bottoming process or where the best real-estate investment opportunities currently lie (to be sure, they’re out there). But with careful analysis of individual markets, trends can be identified.

Submarkets where price discovery — that is, the process of returning to an environment where natural supply-demand fundamentals can thrive — is further along pose a far smaller risk than those markets where sellers have been hunkering down, hoping the maelstrom would blow over their quiet streets.

So while pundits argue over whether the housing market has “bottomed,” we can all ignore their drivel, knowing this is a meaningless statement. Price discovery doesn’t happen on a national scale; the massive and disjointed real-estate market is made up of thousands of tiny micro-markets, each of which is at a different point along the highway of price discovery.

Cirios Verdict: (ALMOST) DEAL (Click here for the original Deal or No Deal post)

The subject is a small home in the Berkeley Hills on a large lot, a good portion of which is usable. Crystal Way is a not-through street located in the lower part of the Berkeley Hills, close to the UC Berkeley Campus and around a 10-minute drive to the North Berkeley BART. The home is one of the smallest in the area, and also one of the lowest priced.

The Berkeley Hills is a desirable part of Berkeley, with lots of old money, big homes, many of which have amazing views of the San Francisco Bay Area. In general there is not much for sale in this area, especially at this price point. In recent weeks however, more supply is coming onto the market. We expect this trend to continue, and home prices to weaken. Since the broader housing downturn began, this part of Berkeley has held up remarkably well.

The subject is a unique home in the Berkeley Hills in that it is small and priced below $500,000. The only truly comparable homes are located down the hill closer to campus and the BART, as there is virtually nothing in the Berkeley Hills that is similar to the subject. For this reason, we believe the subject should sell close to list, but we believe a buyer should be able to talk the seller down a bit.

Address: 30 Crystal Way, Berkeley, CA 94708
List Date: 6/30/2009
Current List Price: $499,000
Cirios Value: $499,000
List Price vs. Cirios Value: 5.0% over-listed

For a complete Cirios Valuation, click here for our CLEAR report, or on the image to the right.

Have a home you’d like Cirios to use for our next House of the Week?

Ask most anyone familiar with Bay Area real estate which city has more expensive homes, South San Francisco or Millbrae, and the response is likely to be unanimous. South City doesn’t exacly have the reputation for high-end real estate.

But taking a look at the graph below, during the boom, South City tracked Millbrae pretty closely, as measured by price per square foot. In fact, in 2004 then again in 2005, South City even hit the same level as its neighbor to the south.

Since the market started tumbling in 2007, the gap between the two has widened. This partly reflects the fact that South San Francisco has had a higher foreclosure rate than Millbrae, so homes in poor condition are selling at a higher clip, dragging down price per square foot. In South City we’re now back to levels not seen since 2002, but in Millbrae we’ve only reached 2004 prices.

With the new appraisal guidelines restricting buyers ability to get loans, the next few months should be very telling with respect to how the already battered housing market can continue the healing process.

Cirios Verdict: DEAL (Click here for the original Deal or No Deal post)

The subject is a modest sized home in Lafayette with good curb appeal. Most parts of the home could use upgrading but it could be lived in immediately. The lot is basically flat which is desirable as many homes in Lafayette do not have usable lots.

Lafayette is a desirable upper-middle class neighborhood about 30 minutes east of San Francisco which is a short drive or BART ride to Walnut Creek or the city. Schools are above average and crime is very low. Unlike many of the wealthy areas in the Bay Area, Lafayette can be considered affordable and this fact should only increase its desirability in the near term.

Most homes in Lafayette are selling for above what the subject is listed for which makes it an attractive property just based on its price. Most buyers in the market for a home in Lafayette expect a turn-key home but for those buyers looking to create the home of their dreams – the subject could be the home for them.

Address: 926 Moon Ct., Lafayette, CA 94549
List Date: 6/16/2009
Current List Price: $550,000
Cirios Value: $550,000
List Price vs. Cirios Value: 0.0% over-listed.

For a complete Cirios Valuation, click here for our CLEAR report, or on the image to the right.

Have a home you’d like Cirios to use for our next House of the Week?

The Berkeley Hills aren’t exactly know for affordable homes. That’s because there aren’t really any up there. But this week’s Deal or No Deal property, 30 Crystal Way, is just about as cheap as houses get to live in one of the most sought after neighborhoods in the entire Bay Area.
(click on images to enlarge)

The house isn’t huge, to be sure, but with an 8,000 square foot lot you can just spend your time barbecuing outside on the patio.

Of course, that’s if the property is in fact a deal.

Home prices in the Berkeley Hills have held up better than most other parts of the Bay Area, but as of late have begun to slide. This is partly due to the fact that distressed sales or otherwise forced sales have been few and far between. Most people that move to this area don’t leave unless they have to, so it makes sense that Price Discovery has been slow to come to this hillside community.

Nestled at the end of a cul-de-sac, and with monthly maintenance (mortgage, taxes, insurance and upkeep, assuming 20% down and market interest rates) of less than $3,000 this could just be a ticket to privacy and quietude not easy to find at this low of a price.

That all sounds great, but is this house a: DEAL or NO DEAL?

Address: 30 Crystal Way, Berkeley, CA (MLS Listing)
Status: ACTIVE
Bedrooms: 2; Bathrooms: 1
Living Space: 1,020 sq ft
Lot Size: 8,190 sq ft
List Date: 6/30/2009
Original List Price: $499,000
Current List Price: $499,000
MLS no.: 40417417

Real Estate Agent Comment: What a bargain! Fantastic Berkeley Hills mid-century hideaway. Large lot, bonus office/studio; refinished hardwood floors and much more! Secluded, yet close to Berkeley Rose Garden, Codornices Park, N. Shattuck & Solano Streets, AC Transit, BART.

DEAL or NO DEAL?
Comment below and tell us what you think!

With all the news of the collapse of high end real estate, it’s comforting to see some intrepid investors bucking the trend. Sure, they may lose their shirts, but more power to them for giving it a shot.

Farallon Capital Management, a well known San Francisco-based hedge fund, is bankrolling a stalled project to develop 1,600 acres of land in Orinda into high-end homes. According to the San Francisco Chronicle, Farallon plucked the developer, OG Property Corp, out of insolvency and is looking to bring “Wilder” back from the dead.

According to Steve Millham, Managing Member with Farallon,

“In any economy, Orinda is at the top of a short list of truly exceptional placrs to live and raise a family in the San Francisco Bay Area. We have always had confidence in the long-term value of Wilder.”

We at Cirios wish you luck sirs.

How does Orinda stack up against neighboring Lafayette? Check out this anaylsis by Cirios Real Estate.

Despite markedly higher interest rates and problematic new appraisal guidelines, homebuyers are still stepping back into the market.

The National Association of Realtors said yesterday that pending home sales, which measure new purchase contracts signed, rose in May for the fourth consecutive month. According to Bloomberg, the 0.1% gain from the prior month barely edged out expectations that the gauge would remain unchanged.

Bottom calling is once again en vogue, as an analyst from BMO Capital Markets in Toronto said

“We’re starting to see sales stabilizing. We’ve probably reached bottom or are close to that.”

As discussed in this month’s Cirios Trends, this incessant bottom calling is a farce. To say that “the housing market” has bottomed is a meaningless statement, since local markets often move independently of the broader trend. Anyone calling a bottom in the broad market is likely trying to sell you something, or trying to get their name in the paper.

Only careful analysis of local trends, sales patterns and inventory level can provide insight into the near term direction of home prices. Looking for this very thing for your market? Contact Cirios today!